UK growth managers look to size for value

Despite a lack of strong consensus, UK growth fund managers see fewer opportunities in mid-caps against a background of continuing macroeconomic volatility and pricing pressures, according to Standard & Poor's Fund Services in its latest sector review.

"S&P Fund Services rated managers are tending to move away from mid-cap stocks, seeking value in large- and mega-caps at the margin," said S&P Fund Services lead analyst, Daniel Vaughan. "A bull run since the late 1990s, together with a strong rally from the March 2009 lows led by cyclical companies, has left some market commentators talking about a potential mid-cap bloodbath in 2010."

Ben Whitmore at S&P AA rated Jupiter UK Special Situations Fund, for example, says his screens are increasingly directing him towards FTSE 100 companies, with far fewer value plays to be found among FTSE 250 constituents. Likewise, GAM's Andrew Green, who manages the S&P AAA rated UK Diversified Fund, believes the strong mid-cap rise is unlikely to persist and sees better opportunities up the cap scale.

Mark Lyttleton, who manages the S&P AAA rated BlackRock UK Fund, points out that the FTSE 250 is at a record high against the FTSE 100 in price terms, but that the latter offers higher 12-month earnings per share growth. Fidelity UK team head James Griffin, who runs Fidelity Investment Funds - MoneyBuilder Growth Fund, consistently focuses on companies in the top half of the FTSE 350 and believes large-caps look cheap. At review, 96% of his portfolio was invested in FTSE 100 companies.

However, not all rated managers in the peer group agreed with this view and two highly rated managers have more mid-cap exposure than ever. Tom Dobell at M&G continues to find opportunities in the mid-cap area and says he would not be uncomfortable increasing exposure to 20-25% of his S&P AAA rated Recovery Fund at the expense of AIM. Karen Robertson at Standard Life also has a greater bias to mid-caps (30% of the portfolio) than in the past, as the house has a strong view on mid-cap industrials, particularly in the engineering sector.

Other managers with a high allocation are Richard Plackett at BlackRock, whose S&P AA rated UK Special Situations Fund holds 57% of the portfolio in FTSE 250 companies, Edward Legget at S&P A rated Standard Life Investments UK Equity Unconstrained Fund, who has 58% and Richard Watts at Old Mutual's AA rated UK Select Mid Cap Fund, who has around 80%.